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TMI Blog2015 (6) TMI 450X X X X Extracts X X X X X X X X Extracts X X X X ..... covered within the exception in clause (ii) of section 2(22)(e) of the Act. 3. The appellant prays that the order of the CIT(A) on the grounds be set aside and that of the Assessing Officer be restored." The grounds of appeal raised by the assessee in the cross-objection read as under: "1. The Ld Assessing officer has erred in stating that M/s. Silgo Finance Pvt. Ltd. (lender company) was not engaged in business of money lending as it has not shown any interest income, which is contrary to the facts of the case, as the assessee had received interest income which was net off against interest paid. 2. Without prejudice to above, the Ld. Assessing Officer erred in making the addition of entire outstanding balance of Rs. 1,09,38,061/- without appreciating the fat that the M/s. Silgo Finance Pvt. Ltd. had advanced only rs.79,00,000/- during the year, in the course of its regular business. Hence, addition u/s. 2(22)(e) may be deleted." 3. During the course of assessment proceedings, from the details filed by the assessee, the AO came to know that M/s. Silgo Finance Pvt. Ltd. (referred to as Silgo) had advanced loan amount of Rs. 1,09,23,897/- as on 31.03.2006 to the assessee. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e said decision of the CIT(A) and filed the aforementioned grounds of appeal. 4. In the cross objection, though the issue has been decided in favour of the assessee, it is the case of the assessee to the extent of opening balance, the amount could not be assessed u/s. 2(22)(e) as per the aforementioned decision of Hon'ble Bombay High Court in the case of CIT vs. Parle Plastics Ltd. (supra). It is also the case of the assessee that the expenditure of Rs. 6,03,797/- which is on account of provision of interest, the amount could not be considered as deemed dividend. 5. After narrating the facts, it was submitted by the learned DR that the AO after going through the Profit & loss account of the assessee has arrived at a finding that the assessee's case do not fall within exception laid down in section 2(22)(e)(ii) as the lending of money could not be considered to be substantial part of the business of Silgo. The learned DR in this regard referred to the observations of the AO in the assessment order whereby at page 3, the AO has examined the Profit & loss account of the assessee in which the income of Silgo is shown at Rs. 3,19,46,629/- which comprises of the following income :- i) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Surplus Profit and Loss Account 28,343,780 Secured Loans B 538,013 Unsecured Loans C 37,007,676 Deferred Tax Liability 158,842 66,548,311 The aforementioned funds have been deployed as under: Application of Funds Fixed Asset Gross Block D 2,708,192 Less: Depreciation 251,597 2,456,595 Add: Advances for Property 1,294,716 Total 3,751,311 Investments E 22,527,048 Current Assets, Loans & Advances F 52,828,154 Less: Current Liabilities and Provisions G 12,558,204 Net working capital (F -G) 40,269,950 66,548,311 Schedule F, which describes "Current assets, loans and advances", is detailed as under: Schedule F Rs. Current Assets Loans & Advances : Cash & Bank balance 2,552,096 Loan & Advances 50,271,558 Deposit 4,500 Sundry Debtors 0 52,828,154 It can be seen from the above that out of total funds which are available at Rs. 6.65 crore, the amount deployed in loans and advances is Rs. 5.02 crore. Thus substantial deployment of funds by Silgo is on loans and advances. It is true ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge of a manpower used for a particular part of business in relation to the total manpower or working force of the company would be required to be taken into consideration. Employees of a company are now called its "human resources" and, therefore, the percentage of "human resources" used by the company for carrying on a particular division of business may also be required to be taken into consideration while considering whether particular business forms substantial part of its business. Considering all these facts, their Lordships observed that undisputedly, the capital employed by a company for carrying on a particular division of its business as compared to the total capital employed by it would also be relevant while considering whether the part of the business of the company constitutes "substantial part of the business" of the company. These observations of their Lordships are reproduced below for the sake of completeness: "The expression used under clause (ii) of section 2(22)(e) is "substantial part of the business". We would, therefore, have to ascertain the meaning of the word "substantial", appearing in the expression "substantial part of the business". Stroud's Judic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould give an illustration to ascertain the meaning of the expression "substantial business" or "substantial income" of a company. In the modern days, a large number of companies do not restrict to one or two businesses. They carry on numerous activities and carry on numerous businesses and have numerous business divisions. Let us take a case of a first company which has 3 divisions of works consisting of three different types of business. The turnover as well as the profit of the first division is 40 per cent. ; turnover and the profit of the second division is 30 per cent. and the turnover and the profit of the third division of the business is 30 per cent. In the case of this company no part of the business has turnover exceeding 50 per cent. and no part of the business company generates profit of more than 50 per cent. of the total. In such a case can it be said that none of the businesses of the said company is a substantial business of the company. In our view not. The first business which constitutes 40 per cent. of the turnover and contributes 40 per cent. to the profit would be the single largest part of the business of the company, the second and third divisions of the bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the total assets of the lending company as at the beginning of the year and 39% of the total asset of the lending company at the end of the year were deployed in the business of money lending and considering those facts their Lordships have upheld the findings of the Tribunal that in view of such deployment of funds the Tribunal has rightly concluded that money lending was substantial part of business of the lending company. These observations of the Lordships are reproduced below: Applying these tests to the present case, we do not find that the Income-tax Appellate Tribunal has committed any error in coming to the conclusion that lending of money was a substantial part of the business of AMPL. The Incometax Appellate Tribunal has noted that 42 per cent. of the total assets of AMPL as on March 31, 1996 and 39 per cent. of the total assets of AMPL as on March 31, 1997, were deployed by it by way of total loans and advances. By no means, the deployment of about 40 per cent. of the total assets into the business of lending could be regarded as an insignificant part of the business of AMPL. The Income-tax Appellate Tribunal has also held that the income AMPL had received by way of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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